Started out as a local bank catering to a niche market, Sovcombank became one of the largest in terms of assets and most profitable banking groups in Russian Federation. Sergey Khotimskiy, First Deputy Chairman and co-owner of Sovcombank PJSC, shared with us how their remarkable rise and success is the fruit of their preparedness to change priorities and maneuver at each moment in time. Agility, which is at the core of their banking system, allows them to stay ahead of the competition and deliver exceptional value for their customers and stakeholders.

Hello Mr. Khotimskiy, thank you for taking the time to talk to us today. Let’s start the interview by asking how did your previous business influence your decision to become a banker? We know you were a lawyer and you were engaged in production before becoming the co-owner of Sovcombank.

I produced several movies from 1998 to 2003. The first one was unexpectedly commercially successful. Had I lost money then, I would have probably been more cautious. But my first project, DMB, was a huge success, so I felt encouraged. But then it was failure after failure. At some point, after a series of frankly poor decisions, I realised that this is not up my alley. My then-colleagues, with whom we had started in ‘98, became big producers, rose to a whole new level. I realised that you can only be perfect in one area. You need a grip, and you need to really concentrate on your work, be completely absorbed in it. Now I spend 100% of my time on Sovcombank, and I succeed. What I’m saying is that it’s impossible to do different kinds of jobs at once. Although I don’t have an economics or a banking degree, I have always been interested in banking.

Started out as a local bank catering to a niche market, Sovcombank became one of the largest in terms of assets and most profitable banking groups in the Russian Federation. How has the journey been for Sovcombank considering the strong headwinds and market shudders (e.g., 2008 financial crisis) you encountered in recent years?

Back then, in 2008, there were a lot of large players in the retail market, so we had to find a different approach. We went to small towns, where competition was significantly lower, with small offices – up to 30 square meters, one or two employees, a cash machine and a self-service machine, and no cash desk at all. Such an office pays for itself in an average of six months. So first of all, our credo is to go to the segments or hidden niches on the market where other banks don’t see opportunities.

Sovcombank’s progress throughout the years reflects your optimism and resilience amid the challenges facing the banking industry. In your early years, you provided retail banking for pensioners, which, at that time, was a great fear for other financial institutions. How did you manage to successfully capture this growth opportunity?

Lending to pensioners was considered risky because of the low solvency of pensioners. But while income levels in the segment are relatively low, they have been increasing steadily over the past 15 years. So we decided to run a credit business in this niche while our competitors were negative on it. We accepted the risk and succeeded.

Pensioners take a much more serious approach to taking out a loan. They don’t just see a smartphone and decide they have to have it. They think carefully about their purchases and they are more disciplined about repayments. Historically, the main product that banks promoted in this segment was deposits only. Lending to pensioners was considered risky because of the low solvency of pensioners. But while income levels in the segment are relatively low, they have been increasing steadily over the past 15 years – especially during electoral cycles. So we decided to run a credit business in this niche while our competitors were negative on it. We accepted the risk and succeeded.

With the fierce competition in the industry, what sets Sovcombank apart? What are your unique offerings that you pride yourself in? What’s the foundation for your success?

We call our model “agile banking”. What does it mean? We are ready to change our priorities and maneuver at each moment in time. At any given moment, different niches are of interest to banks. Thus, it is not enough for a bank to be universal and to be able to engage in both retail and corporate lending; it needs to be able to shift focus very quickly and in time. This is what we have been doing all our lives. So, success here largely depends not only on how quickly you are able to make decisions, but also on the presence of very deep competencies and competitive advantages that would allow you at any moment in time to understand which segment you should go to. This is what Sovcombank has always been good at and what distinguishes it from the others: we often made serious changes and shifted the focus of our activities, and we often did so before the rest of the banking market.

This is what Sovcombank has always been good at and what distinguishes it from the others: we often made serious changes and shifted the focus of our activities, and we often did so before the rest of the banking market.

Since the introduction of Internet, there have been a lot of disruptive forces in existence – transforming industries, including the banking sector. How do you keep up in today’s digital banking ecosystem?

Even senior citizens are beginning to explore online banking – about 30% of our elderly customers. Banks have to close branches. However, our model is different and our lean mini-branches are perfect for this new environment. Mobile and internet banking let us stop almost completely servicing the customers in the branches. Our employees are not just sellers anymore. They educate out clients about all possible retail financial products: loans, deposits, accounts, investments, insurance and many more products beyond. We can provide SME-products, mortgages and auto loans. That’s all possible in this micro branch as your employees do not spend time on processing but on consulting, identification, education, deal making, and after that all deals are being closed through remote channels. So, we continue to enter new towns and suburbs where other banks have to exit. For many clients, it is important to be able to come to a bank and ask a question personally. We want customers to be able to talk to someone who lives in their neighbourhood, to someone who understands their mentality. Either on the phone, in a chat, or in person. What about banks that operate without actual offices: they still have to keep the same number of employees per client, and the expenses saved on rent are “eaten” by advertising. And it will always be this way, because as long as people go out, the best advertisement will be a sign on the way home from work and an acquaintance working in a bank.

How would you define your target market? How does Sovcombank address the ever-changing demands and behaviours of your clients?

Right now we serve all retail clients with all possible needs. While we quickly catch up among younger people in big cities, we continue to dominate in small towns and our average customer age is still older than that of our competitors’.

According to a recent Accenture research, over 60 percent of the bank CEOs feel that it is harder to gain customer loyalty today than it was three years ago. What is your view on this? How do you solidify your bank’s position as a trusted financial advisor for your customers amongst other traditional and non-traditional players?

Indeed, now is the time of a very high competition for customer loyalty and only very few banks will be able to win it. The resource for success in this competition is to find benefits for both yourself and the client. In this regard, we have relied on a revolutionary product in the Russian market – installment card “Halva”. This card allows customers to make purchases in interest-free installments in stores from the Bank’s partner network. At the same time, stores pay interest for the buyer to the Bank. Value is created for all three sides of the partnership: customers buy goods by using interest-free installments, stores attract a new loyal buyer, and the Bank effectively distributes risks and receives a reliable source of income in the face of the retailer. We believe that the future belongs to such win-win projects. Such projects can only be effective through scale – with 150 thousand shops Halva is by far the biggest Russian loyalty coalition. There are already more than 2 million cardholders after 18 months since its launch with the number of active cardholders doubled in the last six months only.

Between 2014 and 2017, Sovcombank achieved an average reported ROE of 50 percent, making it the most profitable banking group in Central and Eastern Europe in both 2016 and 2017. What is your strategy to achieve such exceptional performance?

Today Russia is a very appealing market. All players who have transparent capital and do real business instead of lending to their own shareholders make good profit. After 2014 state banks had constraints in certain areas because of western sanctions. Many foreign banks left Russia completely. The access to western market is limited even for biggest corporations. We have established relations with dozens of major American, European and Asian banks. So, we leveraged our independent status and access to major Russian corporations. When everyone sold Russian risk we bought in without hesitation and the award was huge. Of course, that level of one-offs is hard to keep, but in the last 10 years our average ROE (Return on Equity) adjusted for all one-offs was still well over 30%. When we don’t see niches with over 30% ROE we prefer to return money to our shareholders or go shopping to grow through M&A. We never keep financing overheated niches if returns fall. We’re very quick in both entering and leaving products and segments.

As Sovcombank already has a significant exposure in Russia, with over 2000 offices in more than 1000 towns across Russia, what’s next for the company? Are you exploring new business models/partnership?

We do not have specific goals in regards to size. For the majority of its shareholders, Sovcombank is the main business and the key source of income. Therefore, we develop at a pace that allows us to earn and maintain the capital, while also returning a reasonable part of the income to our shareholders. The scale helps reducing unit costs. But the only line in the report we are interested in is P&L (Profit and Loss Statement), in other words, how much money we earned. This is the only thing that guarantees stability and resources for development.

We have always thought about IPO (Initial Public Offering), but there were times when either we or the market were not ready. Right now is obviously not the time, but we would like to go public in the future. But first, the situation must be ripe, the market must be ready, and investors must be prepared.

One of the latest major shifts for Sovcombank has been the merger with RosEvroBank, expert institution in small and medium size companies. We launched the process on the 1st of May. We finalised the procedure on the 12th of November. For such large banks, six months is a record term. This is a positive process for our customers, as the bank’s product line will expand.

Within the span of your professional career, what are the most significant things you have discovered/learned? What would be your advice for those aspiring to succeed in the financial industry?

Knowledge and experience is the key platform for harmonic risk management, the only way to success in financial business.

Everyone has their own approach, but I believe that success comes through experience and knowledge. You build your reputation and trust of your clients, partners, employees, shareholders year by year and it pays you back. And you need knowledge. When bank executives rely too much on other people or experts without personal deep knowledge of the area they operate, they usually either lose on risk or too conservative which is not a lesser mistake. Knowledge and experience is the key platform for harmonic risk management, the only way to success in financial business.

Thank you Mr. Khotimskiy. A real pleasure speaking with you. We have learnt a lot.

Sergey Khotimskiy is the First Deputy Chairman and co-owner of Sovcombank PJSC. He was born in 1978 in Moscow. In 1999, he graduated from the International University in Moscow (IUM), majoring in law. Sergey Khotimskiy entered banking in 2001, when he and his partners acquired Buikombank, one of the smallest banks based in Bui, Kostroma Oblast, which later was renamed Sovcombank. Currently, Sergey Khotimskiy and his brother Dmitry own over 30% of the Bank’s shares, and he himself directly participates in the operations management of the credit institution.

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